Comstock Partners, Inc.September 01, 2016
Central Bankers Have Failed to Stimulate Thus Far
But Have Produced Unintended Consequences
As most of our viewers know, we have not been happy with the world’s central bankers over the past twenty years and have expressed those feelings. The U.S. Fed is the most important central bank among the major central banks of the world, as the U.S. economy is the most important of all major economies. But, unlike corporations that are usually managed by people that have spent their lives working in business and industry, the Fed is managed by people that are in many cases from the academic world. The U.S. economy is now in the hands of those running models based on theories and formulas that they can only “hope” are correct.
We have stated in the past that the Fed, through the largest expansion of its balance sheet ever, several QEs and an operation twist, is conducting a grand monetary experiment. Now it is possible that they will accomplish their objectives and the economy will de-lever and grow, and all will be fine…but we don’t think so. In fact, we give a good outcome a close to zero chance. We are also of the opinion that we are in “uncharted waters” and are certain nothing like this has ever happened previously. We speak, of course, of the unprecedented intrusion into price discovery (interest rates) on the part of the Fed and other major central banks. Through this intrusion, stocks, bonds, major currencies, real estate, collectibles, and just about anything you can think of, that has to do with the cost of money, is terribly overpriced. There are, however, two things we think are underpriced, risk and precious metals. The aforementioned intrusion into the pricing mechanism of financial markets have pushed investors of all kinds much farther out on the risk curve than is generally perceived. In addition, the across the board printing of money to expand their balance sheets will, in our opinion, debase the major currencies versus precious metals over time.
We started discussing our criticisms of the Fed in the late 1990s. Since then, we have criticized these officials many times with our latest documented criticism being:
We wrote in May of 2013, “The Fed is in a Lose-Lose Situation”.
In January of 2016, “Difference between Past Fed Tightening and Now”.
In February of 2016, “More Fed Criticism—We Are in Good Company”.
In July of 2016, "The Central Bank Bubble Is Worse Than the Dot Com & Housing Bubbles.”
There were many more-- and you can find them by clicking on the latest comments and scroll down the older comments. When you get to the bottom, just click “next” to find the others.
The central banks of Europe and Japan have gone even farther than our Fed. On their balance sheets they carry corporate bonds (ECB) and equities (BOJ). Through ETFs the BOJ is now a top 10% shareholder in 90% of the market capitalization of the Nikkei 225. To add to the insanity, in Europe, Japan and other non EU countries, interest rates on government bonds are negative, out in some cases past 10 years, and are nominal out to 30 years. There are $12 tn of bonds now trading at negative rates and central banks own $25 tn in stocks and bonds. Clearly, investments cannot be efficiently made by corporations when the cost of capital is being determined by fiat, rather than the marketplace. It will take time, but lots of bad investments are being made, and lots of productivity and capital will be lost.
Just when we thought this was about as insane as it could get, we find that Ben Bernanke visited Japan recently and it was reported that the topic of “Helicopter Money” was discussed. “Helicopter Money” is turbo charged QE. In QE, central banks create money from thin air to buy financial assets in the marketplace from investors. Now imagine central banks creating money to fund infrastructure projects, tax cuts, bombs that blow up or “helicopter drops”. That’s “Helicopter Money”!!
Even more insane is the fact that the central bankers don’t realize that the most likely outcomes will be those that are “unintended consequences”. So let’s summarize by stating what we believe the Fed and other central banks have intended. Simply stated, the central banks have tried to stimulate their respective economies by inflating financial asset prices and lowering interest rates to near zero (ZIRP), and in some cases below zero (NIRP). That was supposed to cause people that owned financial assets to feel wealthier and spend money, and also to cause businesses to borrow to invest in plant and equipment to help grow the economy.
That was the intention. Here is list of just a few unintended consequences we can think of:
In closing we would like our viewers to understand that what central banks are doing has not been done before. To that extent investors, markets, corporations and populations are all in “uncharted water”. No one knows for sure how this will all play out. But, we believe that what has been done by central bankers for 7.5 years has not worked. With or without “Helicopter Money”, we believe a major bear market is coming. If and when that happens this era will be forever known as “The Central Bank Bubble”.